My paper “Amidst
Bullish Hoopla: A Behind the Curtain Look at Fed Desperation and
Intervention Wizardry,” as well as sources cited in my “Learning
the score” article, make it clear that long term interest rates
are being kept artificially low by the Fed. Let us think for a moment
what interest rates might be if set by a free market. Over the past
few years the money
supply has been growing by about 10% a year. Historically long term
interest rates have been at least as high as the rate of money supply
growth (which tends to correspond with the inflation rate). On top of
this, investors have historically added about 2-3% over the rate of
inflation as their real expected rate of return. So now we are up to
around a 12% interest rate. On top of this, investors, typically penalize
countries that live beyond their means by adding on at least another
2-3% to compensate for additional risks. With growing total personal,
corporate, and government debt at over three times GDP and growing balance
of trade deficits currently over 5% of GDP, the US economy is increasingly
beginning to look like that of a banana republic. So now we are up to
a potential “free market” long term mortgage rate of around
14-15%. Relative to this, current 30 year mortgages under 6% may constitute
a kind of perverse “gift” from the Fed.

I believe that eventually the free market will take over, and that
it is likely that never again in my lifetime will I see long term interest
rates this low again in the U.S. I use the word “perverse”
when describing the Fed’s “gift” because my views
on the character of the Fed and its impact on America are very similar
to those of credit system analyst Doug
Noland, Congressman Ron
Paul and Mises Institute President and libertarian commentator Lew
Rockwell. (Please note the Mises Institute video “Money,
Banking, and the Federal Reserve” which features the latter
two aforementioned individuals). Fed interventions are ultimately financed
by forms of monetary and credit inflation. Inflation is ultimately a
sneaky form of taxation on the American people. Despite all the financial
manipulation by the Fed and US Government and spin doctoring by the
national media, in the long run in economics there is are no free lunches.
Nothing of enduring value is ever created out of thin air. Take whatever
“gift” the Fed will give to you now, because much more is
being taken out of your hide in more subtle ways both today and further
down the road.

Artificially low mortgage rates are a tiny silver lining of benefit
for people who can refinance their homes in what is otherwise a very
unfortunate and very serious overall national financial situation. Reducing
your interest rate costs is smart. I do not, however, encourage individuals
to use their homes as ATM machines, take out home equity loans, and
decrease their home equity. I believe that we are headed towards a very
serious recessionary economic crisis, and individuals should be battening
down the hatches and trying to find better ways to fortify their current
sources of income and reduce their vulnerability to indebtedness and
potential bankruptcy in every way possible.